Facts

These are facts according to claimant's counsel: In 2003, claimant Patsy Bates, 52, who owns a hair salon in Gardena, was persuaded by a Health Net insurance agent to switch her existing health insurance policy over to Health Net. The agent, Robert Torres, visited Bates at her salon and filled out the application, in violation of California Insurance Code provisions and Health Net policy. Torres later changed Bates' weight on the application and initialed the change, also in violation of the Insurance Code.

Health Net accepted Bates application. In September 2003, Bates was diagnosed with breast cancer, and underwent cancer surgery and chemotherapy and radiation treatment, all of which Health Net authorized.

In 2004, Health Net canceled Bates' coverage, claiming Bates misrepresented her weight and omitted information about a pre-existing heart condition. Bates claimed she had no such heart condition. After the rescission, Health Net refused to pay more than $129,000 in medical bills, forcing Bates to cut short her cancer treatment.

Bates argued that Health Net breached its contract and acted in bad faith. Bates argued Health Net failed to underwrite the policy when she applied even though she had authorized the insurer to obtain all her medical records. Bates also argued that the conduct of Torres, including his illegal alteration of Bates' weight, raised reasonable questions about the application that should have been addressed by Health Net before the policy was approved. Waiting until after Bates became sick with cancer to investigate her application rendered the insurance illusory, Bates argued.

During arbitration, Bates revealed that Health Net set annual rescission quotas for its employee in charge of canceling policies, then awarded bonuses when the quotas were met. When California's Department of Managed Health Care learned about this practice in November 2007, it fined Health Net $1 million and required Health Net to enter into a Consent Agreement in which the insurer agreed to discontinue the program.

These are facts according to respondent's counsel: Bates had been diagnosed with a heart condition allegedly resulting from her prior use of Fen-Phen. Before applying for insurance with Health Net, Bates had already received some money as part of a class action settlement with the maker of Fen-Phen, and ultimately Bates received several thousand dollars through her participation in that class action. Shortly before applying for the insurance, she had been referred for further cardiology testing related to her heart condition. There was evidence that claimant had discussed her heart condition with numerous people both before and shortly after applying for insurance. On her Health Net application, and in response to direct questions about the status of her heart, Bates denied having any heart condition.

Insurance agent Robert Torrez had contacted Bates regarding a change of her health insurance from her existing provider to Health Net, advising her that he may be able to get her a better rate. Torrez filled out the Health Net enrollment application for Bates, after asking her health-related questions. After Bates signed the application, Torrez changed Bates's body weight on the application and signed his initials by the alteration. Torrez testified that the Bates agreed to the change by telephone. Bates was insurable under either of the handwritten weights, but her weight as stated in the medical records was at least 25 pounds higher, which was beyond the insurable range.

The policy was approved effective Aug. 1, 2003. Health Net made no medical investigation prior to issuing the policy; where the application disclosed her doctor Bates' signed application stated "Everything OK" concerning her last visit to that doctor notwithstanding the fact that at that visit Bates again discussed her heart condition with that doctor, who sent her for testing on her heart and chest. In December 2003, Health Net sent a letter to Bates asking for clarification of certain responses. In January 2004, Health Net rescinded Bates's insurance policy, because of alleged failure to disclose her heart condition and misrepresentations regarding her weight.

In some years, Health Net set annual rescission goals, expressed in terms of numbers of rescissions or savings from rescissions. A portion of the bonus paid to Health Net employees engaged in rescission work was tied to achieving rescission goals - at most $276 in any year. Health Net contended there was no showing that the existence of this minimal bonus caused anything wrong with the rescission.

In September 2003, Bates had been diagnosed with breast cancer. She had unpaid medical bills of $129,809 at the time of the arbitration hearing.

Bates submitted the case for arbitration against Health Net, for breach of contract and breach of the duty of good faith and fair dealing.

Bates claimed that Health Net had no right to rescind the policy, that it failed to comply with provisions of the California Insurance Code, and that the process by which the application was completed and submitted by Torrez raised reasonable questions which should have been resolved by a pre-insurance medical investigation

Defense counsel argued that Health net acted reasonably and with substantial justification for rescinding the policy, and that it did not act in bad faith.

Result

The judge awarded plaintiff $9,360,000 (includes plaintiff's unpaid medical expenses plus interest, $750,000 for emotional distress; $8.4 million in putative damages). The judge also noted that plaintiff's attorneys may also apply for their attorney fees and costs.